Too Much Cash

Although many companies' cash balances have grown over the past few years, finance executives are taking a measured, disciplined approach to using those funds.

Global apparel giant VF Corp. cuts a stylish figure in the world of fashion with a striking collection of brands that includes Nautica sportswear and Vans outdoor gear. Lately, its balance sheet has been looking pretty sharp, too. At the end of 2004, the Greensboro, N.C.-based company was carrying $486 million in cash and equivalent investments. And that was after spending approximately $600 million on three acquisitions -- Vans, Green Sport Monte Bianco S.p.A. and Kipling Belgium NV -- within 12 months. What's driving VF's fashion-forward balance sheet is the cash flow capacity of its businesses, says Bob Shearer, CFO and vice president of finance and global processes. In 2004, the company generated $6 billion in revenue and accumulated some $730 million in cash. Its debt level remained basically flat throughout the year.

VF has set its sights on top-line growth of between $2 billion and $3 billion over the next five years, Shearer reports, and its cash assets will play a key role in helping it achieve that goal. The expansion will be about evenly split between acquisitions and organic growth. "When you generate a lot of cash, you can make acquisitions and still keep the balance sheet strong," Shearer points out.

VF is not the only organization that's currently enjoying an ample cash cushion, according to research from Standard & Poor's. The 376 industrial companies in the S&P 500 collectively had $626 billion in cash on their balance sheets at year-end 2004, up 25 percent from $500 billion at the end of 2003, reports Howard Silverblatt, market equity analyst in the credit rating and research provider's New York City headquarters. "We've never seen this amount of cash," he says.

While several factors account for the jump, Silverblatt emphasizes two: Strong earnings at many organizations last year boosted corporate coffers. And some companies were able to leverage tax loss carry-forwards and credits, so more earnings hit their bottom line.

Corporate liquidity will remain strong this year and into 2006, predicts Marc Loneux, London-based chief analyst with REL Consultancy Group. But finance executives are resisting the urge to indulge in shopping sprees and frivolous investments, he says. Instead, they are taking a disciplined approach to deploying their cash. "It's an interesting picture today; companies are much more cautious despite their improved liquidity," he observes.

In part, this restraint is a result of pressure from shareholders and credit-rating agencies, says Loneux. These constituents want to ensure that businesses don't repeat the mistakes of the past, such as overpaying for acquisitions. Historically, hefty cash balances have tended to cloud companies' judgment. "Having cash around can lead to managerial slack," notes Hans Stoll, professor of finance in Vanderbilt University's Owen Graduate School of Management in Nashville, Tenn.

At the same time, shareholders are well-aware that cash balances contribute little to earnings. At press time, the 30-day average annualized yield on money market funds was just over 2 percent. Shares of companies that sit on mounds of cash often trade at a discount compared with those of their peers, notes Loneux.

For CFOs looking to deploy excess liquidity, success lies in striking a balance between investments that will grow the business -- mergers and acquisitions (M&A) or capital equipment purchases, for example -- and initiatives that will put money directly into shareholders' pockets, such as paying dividends.